Goldman
Sachs is cranking up its official targets for the U.S. stock
market.

"We expect S&P 500 will
rise by 5% to 1750 by year-end 2013, advance by 9%
to 1900 in 2014,
and climb by 10% to 2100 in 2015," says Goldman's Chief U.S.
Equity Strategist
David Kostin in a note to clients.

Including dividends, this would
represent a 33% total return through 2015.

The key component underlying
the bullish call on the stock market is the investment bank's
outlook for an improving U.S. economy, which will cause further
expansion of the price-to-earnings (P/E) ratio – the valuation
multiple investors pay to own stocks.

Multiple expansion, Kostin points out, already accounts for three
quarters of the market's gains in the rally that has taken place
throughout 2013 already, with only one quarter of the price
appreciation due to increases in earnings.

"Our U.S. economists forecast above-trend growth in 2014 for the
first time in six years," says Kostin. "In advanced economies,
the final year of economic stagnation before GDP growth exceeded
trend has been associated with P/E multiple expansions averaging
15%."

The note goes into a bit more detail on why Goldman expects
multiple expansion to drive the market higher. Here is the key
section:

The macro investment environment supports an above-average
S&P 500 valuation. Our standard valuation approaches
point to a P/E multiple of 14x forward earnings. However, our
revised forecast estimates an S&P 500 P/E multiple of 15x-16x
during the next three years that is above the long-term average
but in line with the post-1990 experience. The S&P 500
forward P/E multiple has averaged 12.9x since 1973 but 15.3x
since 1990.

Changes to our S&P 500
return forecasts reflect a one P/E multiple point premium
to our fair-value
estimates. Reasons for a higher multiple include increased
confidence in the
medium-term outlook for US economic growth, improving investor
risk appetite, and the wide gap between equity and bond yields
that we now assume will be closed more
by stocks than
bonds. Sustained Fed commitment to monetary easing, aggressive
measuresby the Bank of
Japan, and persistent weakness in Europe growth mean US Treasury
yields may remain low despite strengthening domestic
growth.

One of the biggest open
questions in markets is how bond yields will affect the market
once they begin to rise, but Goldman isn't worried.